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Thursday February 3, 2005 - 22:06:58 GMT -

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Dollar Rallies As Non-Farm Payrolls Expected To Be Strong

DailyFX Forex Fundamentals 02-05-05

By Kathy Lien, Chief Strategist of

· Dollar Rallies As Non-Farm Payrolls Expected To Be Strong
· Speculative Positioning in EURUSD and USDCHF Suggest A Further Dollar Rally
· Euro Weakens On Dovish Comments from ECB President Trichet

The dollar continued to strengthen against the euro as nearly all employment indicators released thus far point to a strong non-farm payrolls report tomorrow morning. Taking a look at how the data stacks up, employment gains should be strong in the manufacturing sector with the employment components of the Philly Fed, Chicago PMI and national ISM surveys all pointing to a healthier labor market. More recently, the Challenger layoffs report indicated that layoffs decreased 15% while the online employment index surged seven points to a record high in the month of January. There are signs that more firms are hiring and less has been firing. Jobless claims also increased a much less than expected 316k in the week ending January 29th. This drops the four-week moving average to 331,500 from 341,750, which is the best level since November 2000. Confidence as reported by the Conference Board was also stronger in the month of January indicating that consumers may have been less wary of job losses. The forecast for NFPs currently stand at 200k, with a high of 250k and a low of 100k. The latest economic derivative auction indicates that traders expect US companies to add 225k jobs in January. In our opinion, January payrolls have the potential of being exceptionally strong and the higher risk will certainly be for a surprise that would be positive for the US dollar.


Aside from tomorrow’s US non-farm payrolls report, Greenspan’s speech on the current account 15 min afterwards will also be on center stage. Unfortunately, it is unlikely that Greenspan will say anything particularly positive for the US dollar, since he is a big believer that the dollar needs to continue to correct lower to fix the US’ imbalances. If it wasn’t for Greenspan’s speech, there should be nothing holding back the dollar from rallying tomorrow. In fact, the FXCM Speculative Sentiment Index (SSI) also supports a further rally in the euro. According to report released this morning, the ratio of longs to shorts in the EURUSD is +3.24, which is above the extreme +/-3 range. Net long positions in the euro soared 104.5%, which is the highest since we began keeping record 6 months ago. It is also the highest reading in our speculative sentiment index for the EURUSD since mid October. With short positions falling by 30% and open interest increasing by 40.7%, the data indicates that speculators have aggressively bought euros at current levels ahead of Friday's data. However, the extreme positioning doesn’t just stop there. After spending 4 months in net long territory with net short positions lasting for no longer than one trading session in between, this is the first time that net short positioning has lasted for five consecutive trading sessions in USDCHF. Additionally, short positions increased 129% with long positions falling 22% and open interest rising by 39.75%. This is the highest level of short positioning that we have seen in five months in the currency pair. Taking these 2 sets of positioning data into account, the conditions are favorable for a stronger rally in the dollar in the near term and a possible move below this month’s EURUSD low of 1.2923.


The British pound was taken for a roller coaster ride during the session as traders bid spot sterling higher on a slightly better than expected services index report. However, speculative gains were short lived as profit taking ensued later on at the intraday high of $1.8912. According to the latest services report by the Chartered Institute of Purchasing and Supply, U.K. services industries rose in January to a reading of 55.9 compared with a forecast reading of 55.5. An improvement from the previous month’s release, analysts noted increasing optimism as reflected through the index of business expectations component and eased input prices compared with the December report. Although only slightly above median estimates, the increase in the PMI report may add to speculation of an interest rate move by Bank of England officials when they convene next week. However, with a dearth of recently disappointing economic data, additional evidence may be required in convincing any rate hike consideration.


Breaking through the psychological barrier of 104, the Japanese yen sank to a low of 104.28 during the session. Already 2.5 percent higher than the five year low of 101.69, the currency declined on comments by Bank of Japan Governor Toshihiko Fukui on the recovery of the world’s second largest economy. Stating that substantive evidence must arise to show sustainable economic growth, Fukui suggested that companies, as a result, would elect not to raise prices in the short term. With many economists expecting the first price climbs in eight years for the land of the rising sun, the statements added to overall pessimistic sentiment stemming from previously disappointing industrial production and household spending data. Additionally, contributing to the change in sentiment has been a visible shift in long yen contract positions as non-commercial speculative contracts fell by 6,264 in the past week to stand at 33,608. As a result, traders will be looking for any upward surprises in the leading economic index report tomorrow in lending to an optimistic bias in spite of overwhelming downside expectations.


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